National Lampoon’s Christmas Vacation is one of my favorite holiday movies.  The plot line of the movie is something of a warning about banking on getting something in excess of what you are due.  Clark Griswold traditionally gets a Christmas bonus from his employer and he makes the mistake of assuming that he will continue to receive this extra-contractual payment.  He enters into an agreement to have a pool put in his back yard, but he can’t make the initial payment unless he gets the bonus.  As you night imagine, the boss chooses to terminate the cash bonuses that year - without giving prior notice - and instead enrolls each employee in a jelly of the month club (the gift that keeps on giving all year).  Hilarity ensues with the boss eventually being bound, gagged, and delivered to Clark’s house.  In the end the boss realizes that he was a jerk and reinstates the bonuses.

The moral is that it was reckless for Griswold to enter into a financial agreement that he couldn’t meet unless he received the bonus.  Bonuses are essentially gifts from your employer that you receive at their discretion, unlike your regular compensation that you are given in exchange for your labor at a pre-agreed upon rate.  It is certainly not unreasonable to spend such money on whatever you deem appropriate once it is in your pocket, but it is not wise to spend what you do not yet have.

The state of Alabama has recently found itself in a position analogous to that of Clark W. Griswold.  Back in 2003 a Montgomery jury found that Exxon Mobil “had intentionally underpaid the state for royalties due from natural gas wells the company drilled in state-owned waters along the Alabama coast.”  The actual amount of underpayment was around $100 million, but the jury saw fit to award a punitive award of over $11 billion.  A subsequent jury reduced that amount to about $3.5 billion.  Eventually the Alabama Supreme Court threw out the punitive award, leaving the state to receive only the compensatory award plus interest.  So in the end Alabama got every single penny that was originally underpaid by Exxon Mobil.

The problem is that the geniuses who run our state neglected to tend to our general fund because they foolishly assumed they would be getting the punitive award while the case was still under appeal.  They saw it as a convenient means of skirting their obligation to budget within their means - and now that Exxon Mobil’s appeal has negated the punitive award the state is going to have to make some tough decisions (that they should have been making all along instead of lusting for the money they should not have been owed).

Now along has come our Lt. Gov. Jim Folsom to solve the crisis with a bit of anti-business populism.  Having lost the punitive award in our state’s highest court, Folsom has decided to try to punish Exxon Mobil through higher taxes.  In a letter “to the people of Alabama” Folsom calls for the state to switch from a value based system to a volume based system.

You can read his letter in full at Doc’s, but it bears some discussion.  He begins:

If something is not done, the recent decision by the Alabama Supreme Court siding with Exxon and reversing an Alabama jury’s multi-billion-dollar verdict will have devastating consequences on the people of Alabama.

Actually, it would be the government’s poor planning that will have “devastating consequences,” but we’ll press on…

Only the Court’s Chief Justice sided with the people in the case against Exxon that was brought because Exxon was not paying the full royalties they owed for oil and gas they purchased from Alabama wells in the Gulf of Mexico.

In 2003, after a lengthy trial, an Alabama jury said Exxon owed the state $102 million in additional royalties, plus interest, for gas Exxon had pumped from Mobile Bay.

Despite the way Folsom is portraying the case Alabama has been fully reimbursed.  Effectively, the state has received all the money it would have if Exxon had not underpaid in the first place.  I wonder who Folsom and co. would turn to as the scapegoat to pass on the blame for the inaction of our elected officials had Exxon Mobil never underpaid?

The taxes Exxon pays – or should have paid – go to the General Fund, which funds agencies like Medicaid, Public Safety and Corrections, and countless other agencies of state government that touch the lives of Alabamians every day.

Remember, Exxon has paid (or is scheduled to pay) all of the taxes it owes.

Alabama is blessed with wonderful natural resources, but we must require powerful corporations to pay a fair price if they are going to take advantage of our natural resources – like our oil and gas.

Here we go with the “fair price” routine.  As though a politician has any authority or knowledge about determining what a “fair price” actually is.  One would think that the current tax system, which taxes based on the value, or fair market price, of the commodity satisfies Folsom’s desire.

I will be urging both houses of the legislature to look at changing the oil and gas severance tax from a value based system to a volume based system. That way Exxon will have to pay the same way you do — based on what they pump.

More on the “same way you do” volume system later…

You, the people of Alabama, pay your fair share of taxes, whether it is income taxes, sales taxes, property taxes, or gasoline taxes you pay each time you fill up your tanks with gasoline that currently costs way too much.

There is so much wrong with just that sentence that I barely know where to start.  First, it is refreshing, although a bit deceptive, to hear Folsom praise Alabamians for paying our fair share.  I can’t tell you how many editorials and special interest group press releases and reports I’ve read decrying what is often characterized as a tragically low tax rate in our state.  I’m unconvinced, though, that Folsom is now firmly in the camp that Alabama’s tax burden is sufficient.  Again, who is Folsom to determine if the price of gas is “way too much?”  The price is set by the market, not unilaterally by one of a roughly half dozen major oil companies.

You pay Exxon over $3 a gallon, and they pay little or nothing in taxes, while they report record setting profits.

It first bears reminding that of that $3 a gallon gas, 21 cents are Alabama taxes and another 18 cents goes to the federal government.  Folsom points out the “record setting profits” to play on the financial ignorance of many.  Exxon’s total dollar profits are huge because they are a large company, which is something of a necessity in order to take advantage of economies of scale to keep prices as reasonable as possible.  Also, they are competing in the global market place with larger state run companies, so they must achieve a certain bulk to be able to keep up.  But the profit margins, which I’m sure the average Democrat can’t even conceptualize, of oil companies, including Exxon, are quite reasonable, if not paltry, when compared to, say, technology companies.  And for the record, Exxon Mobil made about $40 billion in profits last year, but paid $28 billion in income taxes alone.  I don’t call that “little or nothing.”

I am against any tax increases on the hardworking people of Alabama. To keep this promise in light of this year’s projected shortfalls in our state budgets, it is clear to me that Exxon must pay more.

Again, Folsom presumes your stupidity.  Taxes are a cost of doing business.  If he raises taxes on Exxon they will just charge more for gas and other refined products.  In the end consumers pay the tax.  Worse yet, Folsom could discourage further production of oil and gas in Alabama by making us a high cost state.  That means fewer jobs AND tax revenue.

Now, what Alabama does not need to do to solve any budget problems is blame someone else for our plight.  Alabama’s legislature and governor deserve the blame.  With that established, the next question is whether a tax increase is appropriate.  I personally believe that the best way to stimulate the economy if times are tough is with lower, not higher, taxes.

If, however, higher taxes are deemed justifiable in this situation is the volume based, rather than value based, method the best?  Alabama’s pseudo socialists feign support for a simplified tax code, a noble goal, although I’m suspicious that their support has more to do with sticking it to an evil oil company than with a yearning for tax simplicity.  I suppose they would prefer the simplest tax code of all, the government simply takes it all and gives you back what they deem fair.  Both tax schemes react in opposite manners to commodity prices.  Value taxing, the current method, means that the government makes more per unit (gallon, barrel, etc.) as prices rise.  When prices drop, so do revenues.  With volume taxing the opposite happens.  When prices rise the government does not see any additional revenue and probably stands to lose money as the invisible hand pushes demand back, inelastic as it may be.  When prices fall the government may realize more revenue if demand increases as it should, but then the rate of taxation on the product approaches obscene levels.  In short there is no perfect solution.  I would guess, though, that value pricing would be more resistant to erosion by inflation.  The volume tax would have to be indexed upward periodically, with well funded oil lobbyists fighting each one tooth and nail.

As with Clark Griswold, the state of Alabama got caught spending money it didn’t have.  Unfortunately having a bulging man in a blue leisure suit abduct an oil company CEO won’t solve our problem.  Government officials should owe up to their culpability in this matter and not blame others or attempt to mete out punishment.

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This entry was posted by Brian on Thursday, January 17th, 2008 at 8:06 pm and is filed under Alabama, Taxes. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site. Please note the copyright policy.